Moody’s, a division of Moody’s Corporation (MCO), becomes the second ratings agency to sound a warning after Standard & Poor’s on the failing economic health of the European Union (EU) partly fueled by the indecision of the political class to address the crisis.

Although the markets were rattled by the announcement as most indices fell and Italian bond yields soared, the political leadership appears to have taken the downbeat mood in its stride. French President Nicolas Sarkozy said, it would be “one more difficulty, but not insurmountable” if France were to lose its AAA rating.

At the recent summit, European leaders agreed on tougher fiscal discipline, such as balanced budgets on the part of individual countries and stronger economic coordination. However, the EU appears to be powerless without individual countries demonstrating leadership.

Good economics will have to begin at home and not at the EU. Moreover, the mood of resignation is surely not encouraging news, as it indicates political weakness in dealing with the crisis.

The situation is becoming increasingly untenable for countries like Greece (Debt-to-GDP – 143% in 2010 – Eurostat) and Italy (Debt-to-GDP – 119% in 2010 – Eurostat) who are at the tipping point of economic collapse. In terms of external financial help, the deal for Greece involves relinquishing as much as 50% of its debt held by banks.

According to the Bank of International Settlements, US banks have an exposure of $767 billion to the European debt market. Credit Default Swaps ($518 billion) and direct lending ($181 billion) are major components of this exposure.

Major US banks – Bank of America (BAC), Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC), Goldman Sachs (GS), Bank of New York Mellon (BK) and Morgan Stanley (MS) were recently downgraded by Standard & Poor’s. The exposure to the European crisis could be one of the underlying reasons for the downgrades.

The crisis is far from over and Europe needs to show more resoluteness and greater political courage to address the task. “The storm in the Euro area casts a long shadow over the entire global economy,” IMF chief Christine Lagarde recently commented.

IMF forecasts a slower global growth rate of 4% for 2011 and 2012. The developed countries will grow even slower at 1.5-2%. Europe has fueled the weak growth forecast for the world and needs to solve the conundrum of ‘growsterity’ or growth amid austerity.